This article first appeared in Forum, The Edge Malaysia Weekly on December 16, 2024 - December 22, 2024

Semiconductors are the foundation of modern technology, ubiquitous in almost every aspect of our modern daily lives, and present in every single electronic device we use. They continue to transform our society and economy as crucial building blocks that power transformative future developments from the artificial intelligence (AI) revolution, decarbonisation efforts to automotive, medical devices, connectivity infrastructures and military systems.

Given their critical role and global trade significance, dominating semiconductor technology or strengthening positions within the supply chain is a key national agenda for many countries. Malaysia, with its strong foothold in certain parts of the supply chain, is capitalising on this momentum. Contrary to common belief, Malaysia’s strength in the industry extends beyond the “back end” services of testing, assembling and packaging chips. The country boasts a robust chain of suppliers and world-class automatic test equipment (ATE) makers specialising in testing integrated circuits (ICs) and semiconductor devices. Over the past five decades, a significant skilled workforce has emerged, although more are needed. These unique features position Malaysia to further entrench itself within the chipmaking industry.

Discussions on Malaysia’s semiconductor strategy often centre on which sectors to prioritise. This focus is not misplaced. The National Semiconductor Strategy (NSS) specifically highlights building an IC design workforce, increasing advanced packaging capabilities and creating globally competitive ATE champions. The priorities are well documented, and policy deliberations are underway. However, what is less discussed is how the economics of different semiconductor manufacturing processes can impact the national strategy and policy interventions.

Semiconductor chips can be broadly categorised by their node size, measured in nanometre (nm), into mature (legacy) nodes and advanced nodes. Although there is no universal agreement on the categorisation, the US CHIPS and Sciences Act 2022 defines mature chips as those produced with 28nm or larger. While there is no official definition of “cutting-edge” chips, current cutting-edge chips are generally considered to be those below 5nm, with 10nm and 7nm chips classified as “highly advanced” nodes.

Advanced process nodes lead to highly complex digital circuits, resulting in higher performance and increased device complexity. These chips are used for AI/machine learning, mobile devices, high-performance computing and block chains/cryptocurrency platforms. They have revolutionised the semiconductor industry and expanded the possibilities for innovation and new products.

In contrast, mature nodes present a different profile. Mature node devices are indispensable as the backbone for electronic systems from automotive electronics, consumer products to aircraft and medical devices. They are also critical in industrial automation applications and military systems where reliability and durability are paramount. Although mature semiconductor processes run on older technology, these chips offer a balance of performance, cost and reliability for mass-market high-volume products.

Reducing the node size is often where major technological advancements occur and where the most high-profile race for semiconductor dominance is discussed. However, manufacturing both mature and advanced chips is equally important. Understanding the strategic and economic differences is crucial for formulating an appropriate national semiconductor strategy.

First, chips using mature technology continue to form crucial components in many devices and will remain relevant to emerging and future industries. For example, development of silicon carbide semiconductors in efforts to decarbonise our economy will require mature chips for functions such as light and sound. This is also true for electric vehicles (EVs) and many Internet of Things (IoT) products. Sixty-seven per cent of semiconductors produced globally use mature process nodes rather than leading-edge process nodes. During the pandemic, one of the choke points leading to the global chips crisis was in mature process nodes, with the automotive industry impacted heavily due to shortages and supply delays in components such as LCD drivers, sensors and power management controllers. The growing shortage concerns in mature chip production is also partly due to manufacturers accelerating capacity building for smaller nodes.

Second, the manufacturing processes of various semiconductor nodes present different economic scenarios. Mature chips, with well-established manufacturing processes, translate into cost-effective products for consumers and high predictability for manufacturers. As a volume game, to get ahead, cost control and efficiency improvement are paramount to ensure profitability and sustainability. The process for advanced chips takes a different turn. As technology continues to demonstrate the validity of Moore’s Law, where the size of transistors continues to shrink, capital and technological know-how become key. A focus on front-end research and development (R&D) is important to stay competitive, as well as the production of precision machinery that can keep up with ever more complex requirements.

Third, countries will face conflicting demands for public resources to invest in advanced chip supply chain capabilities or to provide additional resources for mature chip production. For example, even though leading-edge manufacturing makes up just 15% of semiconductor wafers by volume, it accounts for 44% of the total revenue. This creates new geoeconomic dynamics, as seen through the US’ recent export controls to limit China’s ability to manufacture advanced chips, leading to China’s foundries focusing on mature chips, with the industry anticipating a production increase of 6% in 2025. The impact of this is an increase of dominance in certain countries on non-leading edge chip production, which are still widely used in various consumer and industrial applications, forming part of their national semiconductor strategy. In another case, the EU’s commitment to inject €43 billion (RM200 billion) into advanced chip research and production has drawn criticism from some EU industries and executives, who argued that more resources are needed to develop legacy chips that are more relevant for their immediate needs and market.

All these highlight one crucial fact: Malaysia should not ignore but instead ensure that its positioning in the mature chips supply chain is intact and improving. The increasing demand for mature chips signals that this market will continue to be relevant for decades. Take the case of the global electric automobile market. Valued at US$500.5 billion in 2023, it is expected to grow to US$1.9 trillion (RM8.4 trillion) by 2030. The demand for mature chips will only rise, given that a new EV requires 3,000 chips (compared to 1,000 for an ICE vehicle), most of which are mature nodes greater than 28nm.

Malaysia’s position is unique. With its deep presence in many parts of the supply chain for legacy chips, Malaysia can continue to reap economic benefits if it ensures that domestic companies stay competitive in this area. Therefore, policymakers should strategically consider the importance of specialised mature chips and develop policies that support their production and innovation.

To achieve this, the first step is to conduct a detailed analysis of the nation’s market share, strength and weakness in the supply and manufacturing chain for both mature and advanced nodes. Ambitious targets in the NSS, such as developing R&D excellence in semiconductors, should include specific policies to promote innovation in mature chips too. As demand continues to grow, these chips need to be more energy-efficient, provide stable performance under volatile conditions, and be safer and more reliable. Small and medium enterprises (SMEs) and local players in mature chip-making will require support to enhance productivity through more efficient production processes, automation and easier access to materials. Identifying the specific skill sets required before investing in talent training will create the right workforce. Providing the right incentives to ATE makers to continue to improve their technology for mature node processes will ensure that Malaysia remains a key destination for mature chip production. Additionally, policies that attract multinational corporations (MNCs) to expand existing mature chip manufacturing, alongside courting potential foundries to Malaysia through foreign direct investment, may yield more immediate economic spillovers, especially in contributing to other industries of interest to Malaysia such as agriculture, EV and renewable energy demands.

As the nation accelerates its move up the value chain and increases its presence in new parts of the supply chain, enhancing the resilience of Malaysia’s mature chip production capabilities will solidify its attractiveness as a destination for semiconductor-related activities and investments. This is particularly relevant as industry players actively reshore and offshore to mitigate geopolitical risks, which are likely to increase due to uncertainties brought about by the recent US election. Malaysia is currently a key destination that offers not only neutrality but also a semiconductor ecosystem with a foothold in the mature chip supply chain and increasingly in the advanced chip supply chain.

Formulating Malaysia’s national semiconductor strategy by analysing the economics of trailing-edge versus cutting-edge chips can lead to impactful, targeted policies. Ultimately, the overall national strategy should include policies to enhance the robustness and resilience of the supply base for mature chips while continuing to improve market share in advanced chips. Coupled with efforts to move towards higher-value activities such as IC design capabilities or advanced packaging, this approach will enhance economic security, boost the nation’s competitiveness in the industry and shape Malaysia’s presence in the global ecosystem.

Tan E Hun is executive director of Research for Social Advancement (Refsa), a KL-based think tank promoting social advancement in Malaysia

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